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By Traylor 

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Railroads and the Citizen 

Their Relation 


W HEN we find that sixty-one and three-tenths per cent 
of the population of the United States receive into 
their hands in actual cash some part of the gross 
earnings of railroads;—that one and nine-tenths per 
cent of the population are employed by railroads, and 
that those employes represent dependent families going to make up 
an additional seven and six-tenths per cent, it becomes at once 
apparent that the railroad is a serious factor in the private 
affairs of slightly more than seventy per cent of the population 
of the whole country. 

While disturbance of the earnings of railways would first ef¬ 
fect the employe, its most widely felt and severe effect would in¬ 
variably fall upon a class of citizens not engaged actively in 
transportation pursuits, but whose participation in the earnings 
thereof is as clearly defined and distinctly outlined as is that of 
the wage earner who devotes his whole time to the service of a 
railroad;—a class who outnumber the employe and his depen¬ 
dent family almost seven times, and who receive ultimately a fair 
proportion of more than 18 per cent of the gross earnings of rail¬ 
roads, against 42 per cent of such earnings going to the em¬ 
ploye in the form of wages. In as much as the relation of the 
employe and his family, to the earnings of the business employ¬ 
ing him is universally understood, the purpose of this discus¬ 
sion is to deal with the relation of railroad earnings to the less 
tangible element of the situation;—the relation of such earnings 
to the savings and private funds of slightly more than 61 per 
cent of the whole people;—to slightly more than six of each ten 
persons met in our daily pursuit of business and pleasure. 

In the face of this wide monetary interest it is both unusual 
and significant that throughout the wide discussion of railroads, 
of which we have heard so much during recent months, there 
should have been no evidence of sound consideration of the true 
relation of the railroad and the plain private citizen of the work 
a day world;—of you and I. Not consideration alone of the pro¬ 
portion of an enlarged rate which we have to pay for transport¬ 
ing a pair of shoes, suit of clothes, barrel of flour or something 
else, from the place of its production to our individual trading 
places, but consideration of our personal interest in, and our 
individual proportion of the money earned by the performance 
of that transportation service, and of the danger of shrinkage 
confronting that part of the earning therefrom which finds its 
way into the pockets of the above proportion of our population. 
That this feature of the situation has been overlooked is unusual 
because it indicates either that we are poor thinkers, or that 
something of wide importance of which we should know, is being 


3 



concealed;—it is significant because it indicates the business 
necessity for a broader, clearer and more general knowledge of 
railroads and current business practices than is now in evidence. 

The recent discussion of rates and earning which came about 
through the desire of railroads operating within a particular area 
of country, to increase their rates on certain classes of service, 
introduced argument and economic theory of sufficient novelty 
and magnetism to distract the attention of the public, from the 
public’s most important interest in the matter, and now that the 
“if” has been disposed of and the discussion of theoretical possi¬ 
bilities has subsided to an echo;—clear, sober, unprejudiced in¬ 
vestigation into the question of public interest from another 
angle of observation is not amiss;—in truth there is sound rea¬ 
son for such investigation, and ample cause for the most critical 
examination into the identity of those whose money is invested in 
railroads;—of the individuality of those from amongst us who 
would suffer most from disturbance of existing earnings;—of 
learning who are the real owners of these railways, and the char¬ 
acter of ownership. A great deal has been said and heralded 
broadcast, for and against railroads, but throughout all the argu¬ 
ment, explanation and pleading in both causes, not one person or 
combination of persons have at any time claimed ownership of 
all or any part of such property. Those who defended the cause 
of the carrier during the recent hearings at Washington, went 
there in the capacity of official employes;—of salaried attaches 
of the particular railroads employing them, or as managers of a 
specific function of the general business of transportation. They 
made statements, answered questions, protested positions of the 
opposition and quietly returned to the duties of their respective 
employments, and through all the caustic criticism and stigma of 
reflection to which these men were subjected by the opposing 
forces; regardless of whether or not the steel highways stretch¬ 
ing away in all directions upon the face of the land were re¬ 
stricted, impaired or benefited, there was no audible message of 
inquiry or suggestion from the vast community of money interest 
actually involved; from the owners. 

That was the situation;—but if you have not thought seriously 
of it, the reason for this, and all it means may not be clear, for 
in all probability you have felt that the ownership of railroads 
rests with a limited number of very wealthy men and that they 
are managed for the personal benefit of a select few. If you have 
thought seriously of it, doubtless you have gotten closer to the 
real situation and have mentally outlined some kind of large 
company;—possibly a corporation, which owns them; but whether 
you have or have not thought of that phase of the situation, you 
may not yet have measured up the depth and breadth of directly 
related interests constituting indirect ownership, and have not 
therefore found a connection between the profits of railroads 
and your individual bank account, or insurance policy; or be¬ 
tween the profits of railroads and the gold letters on the bank 
windows at your home town, reading “4 Per Cent On Time De¬ 
posits” and that other one spelling out “Surplus $500,000” or 
some such amount. It may be too that you have not found that 
in your capacity of just plain citizen, you actually receive into 
your own hands individually, some part of the earnings of rail¬ 
roads, and that your personal money interest in those institu¬ 
tions, while not as great, is just as distinct and just as direct as 
is that of the director on a railroad board, or the man holding 
the securities of a railroad in his individual name. 


4 


If you have not measured the situation up from this angle it is 
well to do so, for it matters not whether you are farmer, mer¬ 
chant, clerk, professional or hired man, mechanic, housewife, 
widow or heir;—if you have been economical, thrifty or provi¬ 
dent;—if you have in bank say one hundred dollars or more, or 
if you own insurance of any character, or a share or more of 
bank stock, or are interested financially in an estate, you are 
pretty surely but perhaps unconsciously either a partner in the 
ownership of railroad securities, or are directly participating in 
the money earned by such securities, and it is quite probable too, 
that either the approval or condemnation of any proposition hav¬ 
ing to do with railroads has been and is, incomplete without your 
personal sanction;—in truth you may without great difficulty, 
be able upon reflection to identify yourself as a direct partici¬ 
pator in railroad earnings, whose voice and influence have at 
times gone out against railroads, and so unconsciously against 
your personal financial welfare. 

An absurdity—you say! Far from it;—this identical relation 
between more than 61 per cent of the population of this entire 
country and the earnings of railroads is as clearly, as inevitably 
true, as is the law of natural gravity, and will as safely bear 
searching investigation, but should the proposition seem incred¬ 
ible, impracticable or untrue, or should it impress you as an ex¬ 
aggeration of fact, let us not forget that we are a busy people 
and that the realm of stocks, bonds, and investment is wholly 
separate and apart from the work a day world in which most of 
us live, and that the business chemistry of this realm is peculiarly 
its own. Of the citizens of the average town it is conservatively 
estimated that about one per cent have an intelligent knowledge 
of the practices of the stock, bond, insurance and banking world, 
while about 61 per cent own either bank deposits, bank stocks, 
or insurance, by which it is seen that the density of ignorance of 
the inner workings of modern finance is roughly but safely meas¬ 
ured by the relative difference between 1 per cent and 61 per cent 
of the general population. 

The man who has provided for his family the protection of a 
sound life insurance policy recognizes nothing in common be¬ 
tween that policy and dividends paid by railroad companies; rail¬ 
road receiverships or of bond issues by other roads;—to him there 
is no connection whatever between these things and the protec¬ 
tive value of his insurance or the annual dividend on his policy,— 
say of $6.40 which the agent and the policy itself guarantees to 
him. He pays the company’s price for its risk on his life; he 
knows that he bought a popular contract,—one known as a par. 
ticipating policy. He knows too that he pays a fixed amount, say 
$40.00 per year for one thousand dollars of such insurance, and 
that the insurance company whose policy he has, hands back to 
him about $6.40 each year with the statement that this is his pro¬ 
portion of the earning in which his policy;— his interest in the 
company’s business — participated. He has this amount in his 
pocket in good spendable money, but where and how it was earned, 
where it really came from, and why the insurance company pays 
it to him, and how the forty dollars he pays to them, can buy 
one thousand dollars of insurance and at the same time earn for 
him a cash return of $6.40 he does not know; nor does he care 

If you have life insurance of modern character you have in all 
probability had this identical experience. Perhaps you have ap¬ 
plied this dividend to next year’s premium without thinking or 
caring of how or why it was paid to you, but whether you have or 


5 


have not had such experience; whether you do or do not have in¬ 
surance, it is true that at a late date the large insurance com¬ 
panies considered as a whole, had invested in the bonds of rail¬ 
roads 28.8 per cent and in the stocks of railroads 2.5 per cent of 
their entire asset; a total of 31.3 per cent, or almost one-tliird of 
their asset so invested, and dependent solely upon the earnings 
of railroads for the interest and dividend prompting such invest¬ 
ment, with which to pay a large proportion of the policy divi¬ 
dends which insurance companies pay annually to holders of their 
contracts. Policy dividends come largely through this source and 
it is in such ownership of railroad securities that holders of in¬ 
surance policies have partnership interest. 

If the railroads should cease to make sufficient money with 
which to pay the interest on their outstanding bonds, and divi¬ 
dends on their outstanding stock, the earning which insurance 
companies now realize from their railroad investments would de¬ 
cline, first upon 2.5 per cent of their asset which is invested in 
railroad stocks, by reason of which the dividend on participating 
insurance policies doubtless would contract correspondingly. 
Should the railroads after failing to pay stock dividends, be unable 
to pay interest upon their outstanding bonas, the earning capac¬ 
ity of an additional 28.8 per cent, or of 31.3 per cent in all, of the 
total asset of insurance companies would cease, and the policy 
participation or earning from that source and which had previ¬ 
ously been paid annually to policyholders, under the caption of 
“policy dividend,” would become proportionately or about one- 
third less. While there are to-day several million such policies in 
effect, it may be that the loss of this annual dividend would not 
be a matter of serious consequence to you individually ;—perhaps 
you would not notice it at all,—but what of the face or protec¬ 
tive value of the contract? The owner of the insurance is in¬ 
tensely concerned with that question;—with its validity, or just 
what it would be worth in dollars and cents to the beneficiary to 
whom it is expected the amount named by the contract will be 
paid in the event of the death of the insured. That is the purpose 
of insurance. 

The last available statistics (1909) show there were then in 
effect in this country 28,087,327 life insurance contracts of all 
classes, whose combined face value or measure of protection was 
$15,480,721,211, equaling about $170.00 per capita,—which was 
being paid out to beneficiaries in the adjustment of death claims 
at the rate of $360,730,900 per year. Of the asset or element of 
security and safety back of this enormous number of policies, and 
guaranteeing the financial operations of the companies which sold 
them, 31.3 per cent was invested in and dependent upon railroad 
returns and values. Should the earnings of railroads be insuffi¬ 
cient to pay the obligation of the funded indebtedness of those in¬ 
stitutions, in which the insurance companies have invested so 
heavily, they would be known as insolvent, and holders of their 
securities, technically would foreclose and take the railroads. In 
practice, however, the courts would take charge of and operate 
them for the holders of their bonds, under which procedure the 
life insurance companies now owning one-eighth of all railroad 
securities would be unable to dispose of such securities without 
loss, in consequence of which the margin of safety behind the 
“face value” of 28 million insurance policies would be seriously 
contracted, and the ability of insurance companies to pay death 
claims promptly or in full, doubtless would be placed in serious 
jeopardy. It is eminently certain that the holders of this enor- 


G 


mous number of insurance contracts who have sought to protect 
their families and dependencies do not want such a condition, and 
it is as well certain that the majority of those persons are not 
acquainted either with the character or location of the asset or 
margin of security back of their contracts. 

A bond or share of stock for which you may have paid one hun¬ 
dred dollars when the issuing company was prosperous, could 
scarcely be sold to your neighbor for one hundred dollars after the 
company had become insolvent, unless your neighbor was of a 
speculative disposition, in which event he might take a gambler’s 
chance and pay you—say—fifty dollars for it, by which you would 
lose fifty dollars. If you personally were speculatively inclined 
perhaps you would hold the stock or bond in anticipation that the 
company would be relieved from the receivership and again become 
solvent and prosperous, in which event your investment would 
neither earn money nor represent a reliable or definite amount 
of asset;—it would have none of the elements of value it had 
when it was earning dividends, by reason of which your per¬ 
sonal capital and your ability to pay debts would shrink by an 
amount equal to the difference between the one hundred dollars 
which you paid for that particular security and the amount for 
which you could sell it in the market, and if 31.3 per cent of your 
personal capital was tied up in that manner, the ratio of your 
ability to meet personal obligations would shrink in just that pro¬ 
portion. That is substantially what would confront the face or 
protective value of life insurance contracts of all classes, kinds 
and amounts, if the railroads of this country ceased to earn suffi¬ 
cient money with which to operate and pay interest to the hold¬ 
ers of their securities, and in as much as these figures show that 
throughout the United States about one among each four per¬ 
sons, is the owner of such insurance, it becomes clear that about 
one from among each four persons from all walks of Ameircan 
citizenship, has identically that personal interest in the prosper¬ 
ity and earning of railroads, but as the necessity for reliable 
and solid insurance is most urgent, and contracts are therefore 
most liberally held among the classes of limited or small means, 
it is apparent that the most vital interest in railroad prosperity 
in so far as it affects the investment and safety of life insurance 
companies, rests with the masses of the people, and that you and 
I;—our neighbor, and our neighbor’s neighbor have just that 
business; hence, financial relation to the railroad and that inter¬ 
est in its well being. 

From the banding together of a few clergymen for purposes of 
mutually protecting the families of their clannish little band by 
paying benefits to the dependents of deceased members, imme¬ 
diately before the Revolutionary War, sprung the life insurance 
business of to-day, and the three billion six hundred and forty 
thousand dollars of asset of the companies engaged therein. Much 
of this great amount of money has been accumulated by investing 
the available funds of the companies;—the work of handling such 
investment having become an important and highly specialized 
department of the business, and one requiring thorough familiar¬ 
ity with the character, stability and yield of all classes and kinds 
of investment, industry and enterprise. The early problem of 
getting insurance into effect was solved many years ago. Since 
then the funds have accumulated by leaps and bounds, and while 
the laws regulating such matters require the asset to be invested 
in such a way that at all times they will have a market value, 
the companies, realizing that high rates of earning have the ef- 

7 


feet of increasing dividends payable to holders of participating 
policies, have been guided in investing both by the necessity 
for keeping in line with definite market value and with maximum 
earning capacities. 

Going back into the history of insurance as far as it is possible 
to go, takes us to the period when there was no state insurance 
departments, or other well grounded scheme of assembling invest¬ 
ment information; but by analysis of reports of the more impor¬ 
tant companies doing business during the period when investment 
of the asset first became popular, we find that in 1851, fifty-six 
per cent of the asset consisted of premium notes, a plan by which 
the insured was permitted to pay a part of the premium with an 
interest bearing note; while of the actual cash paid on insurance 
at that time, fifty-nine per cent was invested in loans on real 
estate, half of the remainder in city bonds and bank stock, and 
half was cash in hand. 

At the end of 1854 the then large companies had two-thirds 
of their investment in mortgage loans. Premium notes decreased 
rapidly for reasons technical to insurance, and by the close of 
1855 eighty-five per cent of the investments of large companies 
was in mortgage loans and most of the remaining fifteen per cent 
in state and city bonds, the striking characteristic, as we now view 
it, being the entire absence of investment in corporation securities. 
In 1859 the New York Insurance Department was established, by 
reason of which we have a broader and more detailed record of 
the investment operations of all companies. 

While the Civil War greatly disturbed the value of real estate 
and mortgage loans, it was not until the depression in real es¬ 
tate values which was brought about by the panic of 1873 that the 
value of mortgage loans, as an investment, was regarded as unde¬ 
sirable, and while such investment is still made to some extent 
by most of the companies, its relative importance as compared 
with the whole asset has steadily declined^ This is so because 
the rate of earning from that character of investment is small, 
and because real estate mortgages run only for short periods of 
time with declining rates of return and are then paid off, ren¬ 
dering reinvestment necessary. 

During the Civil War and for a brief time thereafter most com¬ 
panies turned their assets largely toward the purchase of United 
States bonds, but with the disappearance of the premium on gold 
they disposed of such holdings, and only during the panic and 
depression of the seventies did they again purchase heavily of 
such bonds, the remnant of those purchases having been gradually 
disposed of as the scarcity and advancing prices of the past thirty 
years have rendered it advisable to part with them, until such 
bonds have come to be little more than the means for temporary 
investment for idle money. State bonds issued as a means for 
procuring money with which to carry on internal improvement 
of the country during the period of active canal and turnpike con¬ 
struction—1825 to 1840—were a popular investment, but the ex¬ 
perience of companies having such investment subsequent to the 
crisis of 1837, after which twelve states repudiated a total of 
three hundred million dollars of such indebtedness, rendered state 
bonds a highly undesirable investment. Then as states gave up 
internal improvement, counties and municipalities floated large 
issues for the purpose, chiefly of subsidizing projected railroads, 
of which insurance companies bought heavily; nearly one-seventh 
of the total asset of such companies being invested in that man¬ 
ner by 1880. Following the example of the state, however, many 


8 


counties and cities repudiated their securities;—more than one 
hundred towns in Illinois, and ninety in Missouri alone, attempt¬ 
ing that procedure, the result being that insurance companies had 
by 1880 entirely eliminated such investment from their holdings. 
Since that time, however, there has been an enormous increase in 
the indebtedness of sound and safe municipalities with the result 
that municipal bonds have become reasonably safe and are now 
sought by investors who are satisfied with low rates of return, and 
in that way barring insurance companies with whom the pressure 
is severe for greater earning than such bonds pay, but while those 
companies to-day own more municipal bonds than ever before, their 
percentage to the total of invested asset of all companies has 
greatly decreased. In the late sixties the plan of erecting home 
office buildings was developed and carried out much along adver¬ 
tising lines, growing and enlarging and becoming more general 
year by year until to-day almost every company owns its home 
office building, and when we find that the total of this investment 
is now close to one hundred and twenty-five million dollars we get 
near to the reason why real estate, but not real estate loans, forms 
a considerable part of the invested asset. Thus we learn of de¬ 
creases of the insurance company investment in premium notes,— 
in mortgage loans,—in United States bonds and in public se¬ 
curities, by which is suggested and reliably so, the decreasing at¬ 
tractiveness of those forms of investment. 

The most inviting field of modern times has been corporation 
securities, which have proven more stable, more reliable and of 
greater earning capacity than any other. Of this form of security, 
railroad bonds have been found to be most satisfactory and are 
held in largest numbers and amounts. From less than one per 
cent of twenty million dollars of insurance asset invested in cor¬ 
poration securities in 1860, that class of investment has grown 
steadily until there was so invested in 1900 31.3 per cent of the 
then almost two billion dollars of total asset, from the earnings 
of which, dividends on participating policies were being largely 
paid and the margin of safety;—that underlying factor of para¬ 
mount importance to the beneficiary and the insured,—was guar¬ 
anteed. 

During the early period of railroad operation when roads either 
were in an experimental state or were under speculative control, 
their securities were not considered safe enough for insurance 
company investment. Men controlled them too often merely to 
exploit and financially wreck them for personal gain, but as broad¬ 
er and safer plans of operation and more correct methods of man¬ 
agement were injected into the American roads their bonds and 
stocks became solid and high priced, since when insurance com¬ 
panies have purchased them steadily until to-day such securities 
form the largest single asset those companies possess, and while 
the same objection which was present in the case of bonds for so 
many years, i. e., the speculative feature,—applied with even 
greater force to the stock, that too has been neutralized by the pro¬ 
gress of modern times, with the result that railroad stocks are now 
regarded with equal favor, by reason of which the insurance in¬ 
vestment therein has increased. There is objection in some quar¬ 
ters, however, to stock ownership by insurance companies and 
justly so, upon the theory that stock owners are responsible for the 
management of the property whose stock they own, and that by 
ownership of such stock, insurance companies become more than 
trustees of the asset in their hands, and actually enter to some 
degree into the work of control. 

9 




Of other corporate securities held by those companies there are 
approximately twenty-nine million dollars of gas, electric and 
water companies, a similar amount of telegraph, telephone and 
miscellaneous companies, and a considerable amount of bank 
stock, the detail of which is shown by the following table, which 
indicates perfectly the relation between insurance companies 
generally and the railroads: 


Character of asset. 


Percentage of each investment 
by decennial periods. 


Railroad bonds . 

Railroad stocks . 

United States bonds . 

State bonds . 

County and municipal bonds . 

Bank and Trust Co. stock. 

Light and Water Co. stock . 

Foreign public bonds . 

Light and Water Co. bonds . 

Mortgage loans . 

Real estate ... 

Collateral loans . 

Miscellaneous bonds . 

Miscellaneous stocks . 

Policy loans . 

Premium notes . 

Cash items . 

Deferred and outstanding premiums 
Accrued interest . 


1860 

1870 

1880 

1890 

1900 

.8 

1.2 

4.7 

21.2 

28.8 

.5 

.4 

.4 

2.3 

2.5 

3.1 

9.1 

8.7 

.9 

.4 

.6 

1.5 

.3 

.5 

.6 

2.2 

5.5 

14.3 

6.6 

4.2 

1.6 

1.1 

1.0 

1.2 

2.7 

.1 

0.0 

.1 

.1 

.1 

0.0 

0.0 

0.0 

1.2 

3.4 

0.0 

0.0 

0.0 

.6 

1.7 

59.2 

44.4 

28.6 

41.0 

28.8 

2.7 

3.5 

12.4 

10.4 

9.0 

1.6 

1.2 

5.7 

4.6 

4.3 

.1 

.2 

0.0 

.4 

1.7 

.1 

olo 

0.0 

.4 

.2 

0.0 

.1 

.1 

1.6 

3.7 

20.5 

21.5 

5.2 

1.2 

.9 

2.4 

4.3 

4.5 

4.2 

4.3 

3.1 

5.3 

1.0 

1.7 

1.7 

1.4 

1.2 

1.5 

.9 

.9 


These figures are compiled from reports of twenty-eight of the 
large companies and while there can be no logical doubt but that 
securities of railroads form a greater percentage of the asset of 
insurance companies now than at the end of 1900, the writer is 
unable to secure authoritative figures for the current year. 

These then are the reasons why investment of such large sums 
and great proportions of the asset under discussion, in railroad 
securities,—should, doubtless must, by reason of the inflexible 
necessities and operation of modern finance, be continued at least 
until the earnings of railroads decline below the point allowing 
fair and definite returns upon their securities, and the explana¬ 
tion as well, why contraction of railroad earnings would reduce 
the returns to, and impair the financial status of insurance com¬ 
panies, rendering less secure their ability to promptly or fully 
meet policy contracts. 

It is well in this connection to remember that it is not neces¬ 
sary for railroad earnings to decline to the actual level of operat¬ 
ing costs to effect the investment therein, for beyond and in addi¬ 
tion to the dividend or interest earned by a share of stock or bond, 
the element of value imparted to such security by long continued 
success of the issuing company is an important factor, but one 
subject to sudden readjustment through the influence of changed 
conditions. Upon this general subject Mr. George E. Ide, President 
of the Home Life Insurance Company, appearing before the In- 


10 































terstate Commerce Commission last winter, as the representative 
of the Association of Life Insurance Presidents, said in part: 

“I appear for the life insurance interests which represent 
an aggregate holding of railroad securities far beyond 
what is ordinarily believed. * * * * The assets of 

such companies represent accumulations to provide a re¬ 
serve required by law, against each policy, and also a 
surplus fund held for future contingencies. In all com¬ 
panies the reserve fund is distinctly maintained for the 
protection of each individual policy. The surplus fund be¬ 
longs in part or wholly to the policyholders, according to 
the character of the organization. * * * * In the 
company with which I am connected the total admitted 
assets are $23,600,000;—of these assets $6,400,000 is in¬ 
vested in mortgage bonds, $8,160,000 in railroad bonds, 
and $705,000 in railroad stocks;—thirty-seven and one- 
half per cent of the company’s total assets being invested 
in railroad securities. About 45,000 policyholders are the 
real beneficiaries and practical holders of these securities. 
It is not an intangible, vague corporation which owns 
these bonds for the benefit of a few wealthy stockholders;— 
they are held sacredly in trust for 45,000 citizens scattered 
over the entire United States. These are the facts con¬ 
cerning only one of the companies and a small one at that. 

“It is said that if * * * * the earning power of 

railroads should fall below the requirements of dividends 
and fixed charges under existing or future conditions, the 
only sufferers would be the (railroad) stockholders who 
would receive a reduced dividend. This is not a full state¬ 
ment of the case. The value of any prior lien is affected 
by the margin of safety over the lien. Take a mortgage 
loan on real estate (for illustration). It is common prac¬ 
tice to loan only $60,000 on a conservative valuation of 
$100,000. Suppose some law were to be enacted or some 
new condition created which would reduce the value of 
real estate so that this property originally worth $100,000 
should be only worth $80,000. In the first case the mar¬ 
gin on the loan is $40,000;—under the new conditions that 
margin would only be $20,000. The value of the invest¬ 
ment has been impaired and yet the owner may continue to 
pay his interest. It is not necessary to wipe out all of the 
margin before the value of the security is affected.” 

Another interest of very great importance and one more insep¬ 
arably interwoven;—more widely blended with current business 
affairs is the relation of the railroad to the depositor, share owner 
and patron of banks. Usually we feel that money deposited in 
a bank is safe and is earning for us something in the way of in¬ 
terest;—that shares of bank stock are an investment paying sub¬ 
stantial dividends and are attended by but little if any of the ele¬ 
ments of danger. We regard banking as a specialized business 
and in as much as we are busy with our own personal affairs we 
have neither the time nor inclination to investigate the detail 
of banking practices and principles. 

So the matter ends, nor do we think at all of banks except when 
we deposit money, write checks, negotiate loans or perform some 
similar operation or transaction taking us into contact with the 
business of banking. The doctor, merchant, butcher, mechanic, 
carpenter, clerk or hired man of our acquaintance who deposits 


11 


regularly at the bank of our home town, does not as a rule recog¬ 
nize the slightest interest in common with the railroad whose 
trains run through his town;—not the least. They can not 
afford to buy railroad securities nor do they want them, for they 
are saving money for urgent and serious purposes,—one for the 
inevitable needs of old age, one for the education of his children, 
another to buy a home, another to engage in business, and so on 
and on down through the luxuries, necessities and possible de¬ 
sires of humanity. These people are owners merely of savings 
accounts at the banks, and feel therefore that they have nothing 
in common with the railroads; nothing beyond the occasional 
shipment of a little freight or a ride in its cars. That much is 
clearly apparent and is known to the depositor, but of the man¬ 
ner in which the banks handle their savings accounts—of bank¬ 
ing operations and methods, and of the reason why the bank re¬ 
quires them to give advance notice of a desire to withdraw such 
deposits;—of the theory of saving and time deposits, or of why 
a greater rate of interest is paid by the bank for that class of 
deposits, they do not as a rule know, or do they care. It is the 
custom, the rule of banks, and we accept the condition with little 
more than a passing thought, but when we learn that the annual 
reports of 19,194 banks show that they have in their keeping the 
money of 27,979,542 individual depositors, and then estimate that 
the remaining 8,069 banks which did not report the number of 
their individual depositors for the last fiscal year, must each have 
had an average of one hundred depositors, it is seen that the in¬ 
dividual deposits of more than fifteen billion dollars ($15,283,- 
396,254.35 to be exact) which was in the hands of all banks at 
the time of their report to the Comptroller of the Currency on June 
30th, 1910, was the personal saving or other money of approxi¬ 
mately twenty-nine million persons, by which we understand that 
just that number of persons are most surely and seriously con¬ 
cerned with banking operations and the manner in which the 
money entrusted into the keeping of banks is handled;—what is 
done with it,—and when it is remembered that the banking busi¬ 
ness can be conducted profitably only upon the basis of investing 
money, the individual depositor is found to be as vitally and as 
directly interested with the solidity and earning capacity of pro¬ 
positions in which banks invest, as he is in his own personal busi¬ 
ness investments. In truth the operation of depositing money in 
a bank is found to be the practical equivalent to executing power 
of attorney whereby the bank may invest for us a part of the 
money so deposited. 

Both operations are for purposes of profit, but the bank in its 
operations of investment, pools its own surplus fund in which its 
share owners have the interest of ownership, its capital stock and 
a part of the money deposited with it by individual depositors , 
realizing a profit therefrom from which dividends are paid to its 
share owners, its surplus fund is increased, and interest is paid 
to depositors of the money which was used in the investment op¬ 
eration. It is of interest here to note that the law, after fixing 
the percentage or proportion of deposits which banks must retain 
on hand with which to meet the demands oi their current cash 
business, allows them judiciously to invest the remainder for 
their own profit, and when it is seen that the profit from such 
investment is used in the manner above stated it is at once clear 
that in the event of shrinkage of the market value of those things 
in which banks have invested,there would essentially be a corres¬ 
ponding disturbance to dividend and bank stock value, and to the 


12 


rate of interest paid to depositors, and that should the shrinkage 
be sufficiently severe, it would be followed by loss of some part of 
the principle;—the net result depending entirely upon the degree 
of shrinkage,—the excess of money invested, over that which 
could be realized from the sale in the open market of the securi¬ 
ties in which such money is invested. 

Practically, banks are commercial institutions whose merchan¬ 
dising commodity is money. The capital with which to conduct 
such business is obtained from the sale of shares of the banks’ 
stock, part or all of such proceeds being invested in interest-bear¬ 
ing securities, a part of the earning therefrom being set aside 
under the name of “surplus fund” or “undivided profit,” and sub¬ 
sequently used for investment purposes. The money deposited at 
banks is put there first, for safety; second, because such institu¬ 
tions impart to deposits an earning capacity by paying interest to 
the depositors or owners. Interest so paid, therefore amounts 
substantially to rental, a legally determined part or per cent of 
the money so deposited being in effect hired out at a fixed rate, 
for the bank’s temporary use. The conduct of such business is ex¬ 
pensive, in consideration of which the, law allows banks to invest 
for profit as stated previously, all but a fixed reserve which ranges 
from fifteen per cent in small towns, to twenty-five per cent in 
large towns and cities. The amounts so retained at the bank may 
be entirely of cash on hand, or partially of cash on hand and par¬ 
tially of cash deposited with other banks and easily accessible. 
To safeguard the cash so deposited with other banks the law des¬ 
ignates and empowers certain banks to act as depositaries for 
other banks, calling them “reserve agencies.” There are 381 
banks so designated in 46 legally designated “reserve cities,” 
which are closely inter-related to the banking interests of certain 
“central reserve cities,” by which system a wonderfully strong 
banking system or process has been worked out. 

From the foregoing it is seen that the sources from which 
banks derive their ability to invest and to lend money are three¬ 
fold, being 

First; Capital stock, 

Second; Deposits, 

Third; Surplus, or undivided profit, 

and that the sum total of these is the measure of a bank’s ability 
to do business. 

Lending or investing money as practiced by these institutions 
is therefore a form of credit, and must be so because a great 
part of the money which they lend or invest is from their de¬ 
posits and surplus;—the former being the private funds of pa¬ 
trons, and the latter the business capital a the owners of the 
bank’s stock. More directly in line with the facts, however, the 
surplus fund is the private money of the owners of the bank’s 
shares, as is proven in the case of dissolution of banks, when the 
surplus fund is divided upon a pro rata basis among the owners 
of its shares. This being so it is then true that banks are largely 
institutions where credit is created, or manufactured—if you will 
permit the term:—a bank having first acquired the confidence 
of its community, secures credit by purchasing interest-bearing 
securities which are in a broad sense merely evidences of indebt¬ 
edness;—either bonds, stocks, drafts, promissory notes, mort¬ 
gages or other negotiable instruments, which become the bank’s 
asset jointly with money deposited there solely upon the basis of 
confidence;—the value on the market, of such evidences of in- 


13 


debtedness being the real factor of safety back of, and guaran¬ 
teeing the money paid for them, just as the market value of leaf 
tobacco or coon skins was the factor of safety back of the man 
accepting those things in exchange for calico or coffee, in the days 
when leaf tobacco and coon skins currently passed as money. 

On the occasion of the last annual bank report the fifteen bil¬ 
lion two hundred and eighty-three million and some thousand 
dollars deposited with all banks and being used by them in about 
the manner described had been deposited on the terms and aver¬ 
age interest rates below shown: 

Individual deposits subject 


to check . $7,824,005,940 Earning 2.54% interest 

Saving deposits . 4,866,842,682 “ 3.68% 

Time deposits . 1,400,868,843 “ 3.79% 

Other deposits . 1,191,678,789 “ 3.18% 


Total .$15,283,396,254 

In addition to these deposits the banks had a total of 

Capital stock . $1,879,943,887 

Surplus . 1,952,566,187 

This working capital of slightly more than nineteen billion dol¬ 
lars was employed by the banks in the following manner: 

Invested in railroad securities, $1,464,800,000, or 31 per cent of 
total of security investment by all banks. 

Invested in United States bonds, $773,400,000, or 16.4 per cent 
of total of security invested by all banks. 

Invested in state, county and municipal bonds, $1,116,200,000, 
or 23.6 per cent of total of security investment by all banks. 

All other securities, $1,369,000,000, or 29 per cent of total of se¬ 
curity invested by all banks. 

Total invested in securities, $4,723,400,000—100 per cent. 

Outstanding in loans and discounts, $12,521,800,977 

On hand in cash at all banks, $1,869,600,000. 

Total banking capital, $19,114,808,977. * 

Thus it is found that of each twelve dollars and seventy cents 
of capital stock, surplus and individual deposits of all banks;— 
or of each ten dollars and twenty-five cents of individual deposits 
alone, one dollar is invested in railroad securities held by banks, 
which is the measure of disturbance the individual depositor 
whose deposits are partially invested in that way by the banks 
would first feel, through contraction of the ability of railroads to 
pay dividends and interest; but beyond and in addition to this, 
both depositors and owners of bank stock would suffer another 
shock of equal severity, because of the twelve and one-half billion 
dollars which the banks have outstanding in the form of loans and 
discounts, a large proportion is loaned upon the collateral security 
of railroad stocks and bonds endorsed to and left with the banks 
in lieu of cash advanced thereon. It seems highly probable that 
all banks combined have in their vaults to-day many million dol¬ 
lars’ worth of such collateral, upon which they have loaned nearly 
to the face value from their business fund, so we are pretty safe 
in assuming that almost two dollars from each ten dollars and 
twenty-five cents of deposits, is directly concerned with the earn¬ 
ing of railroads, and when we learn that the individual deposits 
of all banks are increasing at the rate of more than eight per 
cent per year (1910 being 8.89 per cent over 1909, and 1909 being 
9.78 per cent over 1908) it becomes clearly evident that the in- 










terest of the people in railroad earnings and conditions affecting 
earnings, is increasing correspondingly. 

The individual deposits of fifteen and one-quarter billion dol¬ 
lars is distributed among the five distinct types of banks in the 
amounts and ratios below shown; the amount of railroad securi¬ 
ties owned by each type of bank being shown in the right hand 


column: 

Percentage to Railroad 

Amount of total deposits securities 

Type of bank deposits of all banks owned 

State banks . $2,727,900,000 17.9% $69,300,000 

Savings banks. 4,070,400,000 26.6% 783,700,000 

Private banks . 124,600,000 .8% 600,000 

Loan and Trust Cos. 3,073,200,000 20.1% 312,500,000 

National banks 5,287,200,000 34.6% 298,700,000 


$15,283,300,000 100.0% $1,464,800,000 

Thus it is seen that the heaviest holdings, i. e., $1,096,200,000, 
or about one-twelfth of all railroad securities outstanding in the 
hands of the public are owned by savings banks and loan and trust 
companies which have on deposit at their combined institutions 
$7,143,600,000, or 46.7 per cent of the total deposits of all banks. 

Of this condition Mr. Lawrence O. Murray, Comptroller of the 
Currency says in the report of his department for the year 1910: 

“Railway and other public service corporation bonds ap¬ 
pear to predominate in the investments of all banks ex¬ 
cept in private and national banks Mutual savings 
banks have over one-half of their bond investment in rail¬ 
ways and other public service corporations. * * * * 

Loan and trust companies have 47 per cent of their in¬ 
vestments in this class of bonds, state banks have 37 per 
cent of their investments in the same class of bonds, stock 
savings banks have nearly one-half of their investments in 
this class of securities, while private banks have in this 
class of investment only $1,700,000.” 

What would happen to these investments if the railroads should 
fail to make sufficient money with which to take care of the in¬ 
terest thereon? The result is perfectly clear;—first, the earning 
to investing or owning banks would contract in ratio correspond¬ 
ing to the decline of railroad earnings;—second, the amount 
which banks could realize from the sale in the open market, of 
their holdings of such securities, would contract and they would 
be unable to realize from the sale of those securities as much 
money as they paid for them, by which process the banks would 
be in the same position practically, as the imaginary individual 
previously cited whose only one hundred dollars was tied up in a 
bond whose value suddenly declined to fifty dollars. If you are 
one of the persons who have money deposited in bank;—and eight 
from among each twenty-five citizens have such deposits,—This 
proposition should be of interest to you personally because it has 
reference to a considerable part of the money you have in bank. 
If, however, you own shares of stock in the capitalization of any 
of the chain of American banks, then your interest in the ques¬ 
tion is even greater because your proportion or pro rata share of 
the surplus or undivided profit of the bank in whose stock you 
are interested, and which is an important instrument in the 
bank’s money making operations, is similarly invested and bears 
therefore a similar relation to the earnings of railroads. 

15 








While there is no available record of the ownership of bank 
stock, or the number of persons thus interested in the total sur¬ 
plus of banks, it seems conservative to estimate the number at 
390,000 persons. Thus it is seen that of the entire population 31.5 
per cent have a direct personal interest in railroads through their 
private deposits of money in banks;—28.1 per cent have the same 
interest through investment in life insurance policies;—.4 per 
cent through ownership of shares of bank stock, and in as much 
as the most conservative figures place the number of combined 
persons and institutions owning railroad securities at one million 
and two hundred thousand, we find by deducting from that total 
of holders,—27,263 banks; one hundred insurance companies (es¬ 
timated) ; and three hundred and eighty railroads which own the 
securities of other railroads (estimated upon basis of Interstate 
Commerce Commission figures), that there are in existence ap¬ 
proximately 1,172,257 additional but individual owners of such 
securities, which is 1.3 per cent of the entire population, by which 
analytic process we learn that 61.3 per cent of our whole citizen¬ 
ship, or slightly more than six from among each ten persons be¬ 
tween the country’s center and its circumference are dependent 
upon the railroads for some part of their cash income, and for 
some degree of the margin or factor of safety behind their depos¬ 
its of money in bank and their life insurance contracts. 

This is so because of modern business practices which have in 
the eternal fitness of things, been worked out between the time 
of an humble beginning and the gigantic proportions of the pres¬ 
ent, in which we are confronted at every angle and turn by the 
obscure interrelations of the private citizen and the railroad 
through intermediate business agencies. The deeper and broader 
and more critically we inquire into the matter, the more clearly 
we see that the ability to profitably invest large sums of money 
amounts substantially to a fine art, and the more definitely we 
are enabled to trace the practices and customs of that art through 
a maze of byways until at last great private interests are lo¬ 
cated in unsuspected places;—unsuspected because we as a peo¬ 
ple are too busily engaged with the business by which our private 
funds are accumulated, to think of, investigate or care about the 
inner working of the banks in which we place our money, or the 
insurance companies whose policies we buy. We are fully occu¬ 
pied by the business of our individual pursuits and do not trouble 
ourselves about the operations or enterprises of those other people. 
This is largely our line of mental logic, it is the temperment of 
the atmosphere in which most of us live, and is the explanation of 
the great degree of our indifference to the economic practices of 
the day, being in part the reason why a great proportion of the 
sixty-one per cent of directly concerned citizens have at times 
lent their personal influence to the creation of sentiment upon 
which is builded much of the so-called reform and many of the 
restrictive movements that have operated toward reduced railroad 
earnings, hence toward reduction of money available for distribu¬ 
tion among holders of railroad securities. 

Should you be uncertain as to the soundness of this position, 
ask your banker about it;—ask him what proportion of the sur¬ 
plus and paid-in capital stock of his bank is invested in railroad 
securities, and why;—ask him also what proportion of the total 
deposits of his bank are actually on hand at the bank in cash 
money, and where the remainder is? If he answers you truth¬ 
fully you will concur fully in my every statement with reference 
to banks, but should his answer not allow you to accept my state- 


16 


merits, go then to a more authentic source of information; go to 
the latest report of the Comptroller of the Currency of the United 
States, which should be on hand at your bank or city library and 
you will find therein more than enough of authoritative detail 
and summary matter from the records of official bank reports to 
bear out my every assertion with reference to banks and their 
operation. Go also to the reports of the state insurance depart¬ 
ments;—to the statistical abstract of the United States and to 
any other source of authority, and check the statements herein 
contained with reference to the operations of insurance companies 
and you will find that the slightest disarrangement of railroad 
earnings is a matter of greater consequence and far more reaching 
in its effect than is commonly realized. 

The roads in which this widely distributed money interest 
exists consisted at the beginning of 1910 of 238,356 miles of line 
upon which the interchange of commodities of all characters and 
kinds goes on uninterruptedly throughout the width and breadth 
of the land, at once in the densely congested industrial areas, the 
sparsely settled rural districts and the isolated frontier region. 
The capitalization of this property is complicated by the fact that 
many roads are large owners of the securities of other roads and 
of property and securities not in a strict sense considerable under 
the head of railroads. The gross capitalization of all steam roads 
as stated by Poor’s Manual, which is looked upon as high au¬ 


thority, was, at the close of 1909: 

Of capital stock. $8,030,680,903 

Of bonded indebtedness . 9,118,103,813 

Total capitalization . $17,148,784,776 

Of this there was owned by railroad companies . . 3,084,387,008 

Leaving in the hands of the public . $14,064,397,768 

Upon this, the return is said by the same authority to hav« 
been: 

Dividends to holders of stock . $295,362,049 

Interest on bonds . 353,162,228 

Total . $648,524,277 


Equaling a few cents more than seven dollars per capita of our 
entire population. There is unquestionable reason, however, for 
the opinion that these figures are misleading both in their appli¬ 
cation to the funded debt of that part of the railroad investment 
concerned strictly with the business of transportation, and the 
return thereto from the direct operation of railroads. Subse¬ 
quent to the period covered by the above compilation the owner¬ 
ship of railroad securities by other railroads has increased from 
three billion and eighty-four million dollars to more than four bil¬ 
lion dollars, thus reducing the value of securities in the hands of 
the public, i. e., owned outside of railroad circles, to $13,710,- 
570,000, from which capitalization it is pretty clearly certain the 
holders received in interest and dividends for the year ending 
June 30th, 1910, about, but very near to $580,000,000, which is an 
average of six dollars and fifty cents per capita for all citizens, 
or about twenty-three dollars and twenty cents for each male citi¬ 
zen above the voting age. 

By comparison it is found that the total thus paid to holders of 

17 












railroad securities is greater than the total market value of last 
year’s entire wheat crop, that the average value of that payment 
per capjta was greater also than the value of all wheat products 
consumed per capita, that is,—the interest and dividends paid to 
holders of such securities was more than was paid for the bread, 
pies, cakes and pastry eaten in all of this country throughout all 
of last year. It was twice the amount of the internal revenue col¬ 
lected by the Government:—about twice the amount of the cus¬ 
toms duty on merchandise imported;—slightly more than the or¬ 
dinary receipts, and slightly less than the ordinary disbursements 
of the Government. It was sufficient to pay the entire cost of dig¬ 
ging and equipping the Panama Canal, and of then endowing that 
enterprise with a fund of almost two hundred million dollars;— 
enough to construct almost six railroad terminals identically simi¬ 
lar to that recently completed at New York, or to build and equip 
almost four transcontinental railroads similar to those now oper¬ 
ating between Chicago and the Pacific Ocean, or to pay the cost 
twice over of all of the irrigation projects thus far completed and 
projected throughout the arid and semi-arid areas of this coun¬ 
try, or to pay for the construction of five Suez Canals. 

This is the comparative measurement in a rough way, of the 
sum distributed annually by the railroads among holders of their 
securities;—the sum which goes out into the general circulation 
of the country through the medium of more than 61 per cent of 
our citizenship, and when it is remembered that the securities 
upon which this sum is paid out into the channels of circulation 
represent more than thirty-one per ecnt of the asset of life insur¬ 
ance companies, and almost ten per cent of the total deposits in 
all banks throughout the land, the economic value and social effect 
of railroad earnings, in so far as the public is most directly con¬ 
cerned, becomes more clearly, yet not fully apparent;—not fully 
because there are not included within the more than sixty-one 
per cent of interested persons heretofore referred to, the holders 
of fire and accident insurance whose issuing companies have be¬ 
come important holders also, of such securities. The exact ex¬ 
tent to which their asset is so invested I do not know, but there 
is before me sufficient data from Harraman’s American Invest¬ 
ments to pretty clearly indicate that contraction of railroad 
earnings, would affect, if not jeopardize, a part at least of the asset 
back of much insurance of that character. 

Beyond these features of the public direct interest in the mat¬ 
ter, the employment of labor to produce those things essential to 
the operation of railroads is a factor of great proportions also. 
Of the two billion and seven hundred million dollars ($2,707,- 
798,990) of ninety-six per cent of the railroads which were defi¬ 
nitely analyzed last year $213,838,384, or 7.89 per cent, was paid 
out for coal alone, to be burned at shops, power stations, stations 
and in locomotives in the process of operating the roads, for the 
production of which not less than sixty per cent of the purchase 
price paid by the roads, or $128,303,000, went to the labor en¬ 
gaged at the time in producing it;—and it is here in order to say 
that this estimate of wage proportions is low, being made so by 
the writer for purpose of conservatism, and that in the district 
with which I am most familiar the miner receives sixty-seven and 
six-sevenths (67 6-7) cents for digging from its bed of deposit 
one ton of the coal used by railroads, (i. e., run of mine coal), 
after which it passes through numerous other hands in going 
from the miner’s pick to the railroad cars or locomotives, each of 
whom receive a daily wage of from $2.70 down to $1.25 by which 


18 


it is found that in reality about eighty per cent of the cost to 
railroads of their fuel coal goes to the labor engaged in producing 
and making it ready for the road’s consumption. 

In addition to ’the coal bill, $247,803,411, or 9.15 per cent, of 
last year’s gross earnings was spent for material and supplies 
other than fuel, i. e., for rails, ties, cars, locomotives, bridges, air 
brakes, draft rigging, car wheels, couplers, signalling devices, 
tools, spikes, hardware, lumber, and the many other commodities 
and parts going to make up the equipment of a railroad, in the 
manufacture of which an average of not less than 25 per cent of 
the price paid by the roads, or $61,965,000, went to the labor en¬ 
gaged in the production or manufacture of those supplies, by 
which it is seen that from the money paid for coal, material, and 
supplies $190,268,000 went to the labor engaged in the production 
of those necessities,—or sufficient money to employ one hundred 
and ninety thousand two hundred and sixty-eight men continu¬ 
ously, at the monthly rate of wage of eighty-three dollars and 
thirty-three cents per man. 

Reduction of railroad gross earning would introduce into the 
' proposition lesser necessity for such supplies and would greatly 
curtail the ability to purchase even those needed, which would in 
turn mean that a great part of the labor referred to would not be 
employed, nor its accustomed earning disbursed to tradesmen of its 
respective communities. So it becomes apparent that the invest¬ 
ment interest of slightly more than sixty-one per cent of the people 
previously mentioned, is by no means the only interest inseparably 
interwoven with the earnings of railroads;—in truth, careful 
computation of all citizens who would suffer reduced money in¬ 
come in some measure and manner through disturbance of the ac¬ 
customed operation of railroads, would pretty surely include not 
less than seventy per cent of the entire population, and a much 
greater percentage of male citizens above the voting age. 

While many propositions are pivotal on earnings, those involv¬ 
ing labor and supplies, in a way adjust themselves automatically, 
and the issue of most direct and paramount importance to the 
general public becomes central in the rate of return from securi¬ 
ties held by individuals, and by institutions in which other indi¬ 
viduals have an interest bringing them some financial return. 
This latter interest does not adjust itself automatically, and while 
the returns thereto fluctuate in a ratio proportionate to changes 
in security values, which come about from time to time through 
speculation by practiced experts or through frenzied markets, the 
usual effect of such fluctuation and disturbance is local, and the 
general equality of action and reaction does, in a broad sense, oper¬ 
ate toward the maintenance of a level of values sufficient to pre¬ 
serve the general favor with which investors regard such securi¬ 
ties. That this will continue as long as earnings are normal, or 
nearly so, there is little cause for doubt, but the ultimate effect 
of the rising scale of costs encountered in the operation of rail¬ 
roads, and the declining rates of return from their operation, 
which has been true of the past several years, is problematical 
and gives cause for serious alarm. It may and probably will 
affect security values finally, for unless the roads find relief from 
the processes which are at work to-day, the time can not be far 
distant when the cost of operation and the gross return therefrom 
may find a common level;—that is when it will cost one dollar to 
earn one dollar. The trend of popular sentiment is largely in 
that direction. 

Under any process of analysis, returns from securities takes us 


19 


by the most direct way to the freight rates back of such securities 
and by virtue of which they exist, for which reason it is impor¬ 
tant that we understand, and fix in mind this;—that freight 
rates never in practice yield definite net returns, the reasons for 
this being found in the widely removed influences to which rates 
are subject through the ever-changing conditions of operation. 
Without any change whatever in the sum total of a rate, its rela¬ 
tive value to the owners of the railroad upon which it is effective, 
fluctuates, and is dependent absolutely upon conditions of opera¬ 
tion and circumstances beyond the road’s control, but by which 
its revenue producing capacity is changed;—the most important 
factors of which are, wage rates, labor conditions and market 
prices of those things railroads must use,—an increase of one or 
more of these units of essential expense often being sufficient to 
throw rate balances out of alignment, and to deprive one or many 
rates of their capacity to produce revenue sufficient to take care 
of operating costs. 

When this occurs, and it has and does at times, the particular 
rate or group of rates so affected may properly be regarded as 
disproportionate, inadequate and unreasonable, and when the 
railroads, who alone, are qualified for the task, find that such a 
condition exists among their rates, it is good business and the 
part of sanity to eleminate the disturbing factor if possible, or to 
increase the non-earning rate if elimination of the disturbing ele¬ 
ment is not possible, and by so doing preserve the margin of net 
earning, just as your grocer or tailor does with you indi¬ 
vidually when he is compelled to pay more for his com¬ 
modity he sells to you, or for the room or building in 
which his business is conducted. In the establishment then, 
of rates capable of producing revenue, in the stead of rates 
which have by circumstances beyond the control of railroads, 
been deprived of their earning capacity, the security hold¬ 
ers of the roads affected have a tremendous interest;—the in¬ 
terest existing universally in matters of business involving or 
affecting one’s private funds;—the interest first, of earnings from 
a particular investment;—second, but superior to the question of 
earnings—of the investment itself. 

Some months ago many questions of this general nature were 
brought conspicuously before the country through the medium of 
an investigation into the need for advancing certain freight rates, 
at which time the country was startled by the statement of an at¬ 
torney from Boston, who, in arguing the case before the Interstate 
Commerce Commission at Washington, said the railroads of this 
country were needlessly spending through unscientific management 
one million dollars each day. 

Those coming most directly under the shadow of that allegation, 
have long since measured and weighed every possibility of the so- 
called “science of management” in its practical application to 
railroads, and, as well, the managerial ana operating qualifica¬ 
tions of the man who made it, and while the utter absurdity and 
fallacy of the allegation is well known within railroad circles, 
doubtless there are many thousands of persons throughout the 
land who are deeply interested in questions of railroad operation, 
who do not have the opportunity or information to enable them 
intelligently to pass judgment on that statement;—persons to 
whom the so-called “science of management” is not thoroughly 
clear, and to whom it has not occurred that that particularly di¬ 
rect statement, voiced as it was at the psychological moment, was 


20 


an effective and artful implement by which the focus of public at¬ 
tention was at once diverted from the merits of the question 
really under consideration, to the theoretical possibilities of the 
“science of management,” and the enormous gains alleged to be 
possible by changing the principles and practices of railroad oper¬ 
ation to conform to a set of fixed rules formulated for the opera¬ 
tion of book binderies, iron works, paper mills, laundries and 
similar institutions. 

I neither know or say that the statement was made particu¬ 
larly for that purpose, nor do I question the sincerity of the gen¬ 
tleman who made it. I merely point you to its effect and to the 
fact that the gentleman who made it was an attorney;—a man 
wholly inexperienced and incompetent, as we know him, in the 
detail of practical railroad operation;—a man of high intellect, 
broad education in the law, and a splendid pleader;—a man of 
remarkable attainment and wonderful success in the practice of 
his life profession, and one who might therefore be reasonably 
expected to know far more of the value to the attorney of unex¬ 
pected moves—quickly executed; of startling declaration, and 
dramatic climax, either in directing or diverting public opinion, 
than he knew of the practical operation of the material thing of 
which he spoke. 

Compare that statement of the attorney from Boston with the 
opinion of W. M. Acworth, a wholly disinterested person and an 
accepted English authority on railroads, as expressed in an in¬ 
terview given to the New York Evening Sun just prior to his 
departure for his home in England on February 1st, in which he 
said: 

“It has always been my opinion that in actual economy 
of operation the railways of the United States are first in 
the world. In number of tons per car, cars per train; in 
the fullest utilization of locomotives; in the obtaining of 
the greatest measure of result for each unit of expendi¬ 
ture, they are not equalled by the railways of any other 
nation * * * * your railways have reached a higher 

standard in international comparison than your farmers 
or your government, and under greater difficulties, for in 
England and on the Continent employment with a railway 
company is a prize and a man hopes to remain in the ser¬ 
vice of the same company throughout his life. He is there¬ 
fore, obviously more amenable to discipline than the shift¬ 
ing and often foreign force employed on your railways.” 

Mr. Acworth is the author of several works on railroads and 
his reviews and opinions are held in high esteem by the great 
banking houses of all Europe. Compare the attorney’s statement 
also with the opinion of the Honorable Franklin K. Lane, mem¬ 
ber of the Interstate Commerce Commission, another wholly dis¬ 
interested gentleman with whom the Chicago Evening Post of 
September 7th, 1910, published an interview just subsequent to 
his return from the International Bailway Congress at Berne, 
Switzerland, where he represented the United States, in which 
Mr. Lane is quoted as saying: 

“The conference established beyond question, I think, 
the supremacy of the American railroad from the stand¬ 
point of efficiency. * * * * Our railroading system 

is without parallel in the world because we are living as a 
nation and in Europe they live as communities. That ac- 


21 


counts in part for the wonderful efficiency of the American 
railroad.” 

There is a wide difference of opinion here, but since the qualifi¬ 
cation for competent judgment by the gentlemen quoted is briefly 
stated, the reader will be able without difficulty, to decide which 
opinion he prefers to accept. 

Usually the authors and champions of public criticism of rail¬ 
roads have been professional men or politicians whose greatest, if 
not sole motive has been fees, salary, or the personal notoriety 
thus attainable;—men whose transportation knowledge and quali¬ 
fication is, as a rule, vastly inferior to that of other men whose 
business pursuits bring them regularly into contact with the busi¬ 
ness or operation of railroads, but unfortunately both for the gen¬ 
eral public and the roads, these men of superior transportation 
knowledge are usually too busily engaged with their personal busi¬ 
ness pursuits to seriously investigate the merits of such agita¬ 
tions, or to become actively interested therein, for they, like the 
banker, bank depositor and share owner are apt not to take the 
time to go far enough into such matters to find the common in¬ 
terest existing between themselves, their business and the carrier. 

Thorough review of the wide distribution and character of own¬ 
ership of railroads, brings the matter before us, however, in a way 
fully justifying the opinion that the business interests of all 
would be advanced if those engaged in manufacture, industry and 
general commercialism, would broaden their range of vision suf¬ 
ficient at least, to observe the diversity of interests which are defi¬ 
nitely present, beyond a narrow line of freight packages moving 
into and out of the warerooms of their respective places of busi¬ 
ness, and to realize that the interest of the majority requires that 
we apply the rule of reason to the railroad in its entirety instead 
of applying the rule of private opinion merely to that particular 
function of the railroad with which we come into personal con¬ 
tact. In this the individual holder of railroad securities, and 
banks, insurance companies and their patrons have intense, if not 
almost infinite interests, and there can be no tenable reason why 
they should not get away from the accustomed practice of ignor¬ 
ing, sidestepping, or straddling the issues of these periodical dis¬ 
turbances,—standing at all times squarely and fearlessly for 
sound, hard-headed business principle, regardless of the individual 
aspirations or political structures with which they collide, thereby 
reducing the allopathic doses of empty hypothesis, severe criti¬ 
cism and needless legislation which is being thrust upon the 
carrier from time to time. 

Clearly the time is opportune for each person who owns, or has 
an interest in a share of railroad stock or a railroad bond to 
awaken to the situation;—to bring himself to understand the 
tendency of the times, and to then interest himself individually 
in clearing the atmosphere of the fog from these recurring out¬ 
bursts whence come impairment to earnings and jeopardy to 
values,—to the railroad as an institution, and the security holder 
as an individual. 

Charles D. Trueman. 


22 





















































































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